Saturday, August 28, 2010

At Fed's End. Hoist with their own petar; and 't shall go hard. The world as bard, as they play their last card.

The boomer generation has born witness to the greatest private misallocation of capital in the modern era, dot-com, followed by the greatest public misallocation of capital in the modern era, blutarsky interest rates and banksters too bankrupt to go broke.

As we continue our walk through the fiscal wilderness it is fitting that 40 days and 40 nights (80 years) brings us 1932-2012. (1929-2009 being just a coincidence, of course.)

What shall we call the next generation? The busted?

The rhyming of the greatest separation of wealth since 1928 brings the spectre of the first full-blown deflationary episode post-WW2 to the forefront once again. The prevailing chestnut that deflation will result in depression is for the most part, per the historical record, nonsense. Worldwide, over the last couple centuries, there were 65 episodes of deflation without depression and 21 of depression without deflation, 65 of 73 deflation episodes had no depression, and 8 of 29 depression episodes had no deflation. Nearly 90% of the episodes with deflation did not have depression. (Atkeson&Kehoe, 2004)

Of course back then we had sound money not found money.

Deflation and depression were interlinked in GD1 of course, but not quite the way most folks believe it was. Inflation expectations were well anchored in GD1 and the black diamond in CPI to mark the onset of that crisis was symmetrical to the pop in CPI in the late 30s. Hyperinflation did not ensue because the 'deflation' more rightly should have been called disinflation, and of course deflation is the midwife of hyperinflation (caught you cribbin' Mr. Edwards.) The disinflation of the 30s was reversed with a 40% currency devaluation, the belief in wizards was strong and well met.

The empirical point to consider though is that this Great Depression is occurring in a sovereign that has the world's reserve currency with a national security apparatus that includes the rating agencies. A volatile mix of mischief that allows folks to not only dispel the administration of medicine but promote the advocacy of alchemy while bloviating on how deflation is truly the hemlock of the people, well at least some of the people.

How does this end? To the sound of great applause, folly's denouement ... and then a long period of silence.

In many ways it is the age old story of Emperors and Pirates, deflation being the Jolly Roger, and a headlong drive into oblivion with the argument that forcing the issue will resolve it. Rummy's chestnut of "If you can't solve a problem, make it bigger."

Methinks the Federales have one 'futile and stupid gesture' brewing to can-kick the ebbing empire, guns and butter redux, although this time perhaps more appropriately phrased as buns and gutter. Ultimately regaled, for those of more modest deportment, as Financial Pornography 101 : Gangbanging a String.

The Fed will end, 2016 is circled on my calendar, hoist with their own petar; and 't shall go hard. The world as bard, as they play their last card.

Tuesday, August 24, 2010

Financial Pulchritude, Ringfence the Multitude, Federales with Attitude, Brother can you spare a Rhyme?

"The worst is over without a doubt."
"American labor may now look to the future with confidence"
"We have hit bottom and are on the upswing"
- James J. Davis Secretary of Labor. (June,Aug,Sept 1930 respectively)

"In other periods of depression, it has always been possible to see some things which were solid and upon which you could base hope, but as I look about, I now see nothing to give ground to hope-nothing of man."
- Former President Calvin Coolidge, (1933)

'He that trusteth in his riches shall fall; but the righteous shall flourish as a branch.'
- Proverbs 11:28

In 1929 the top 0.1% of Americans had a combined income equal to the bottom 42%.

In 2004, the top 0.1% of Americans had a combined pre-tax income of the poorest 120 million people (approximately 40%.)

In 1929 the top 1% of households represented 44.2% of wealth and in 1933 they represented 33.3%. On the second data point hangs the prophetic sword with horsehair splintering over the Oracle at Eccles.

As of 2007, the top 1% of households owned 42.7% of all financial wealth (total net worth minus the value of one's home.) The bottom 80% percent? Just 7%.

As of 2007, income inequality in the United States was at an all-time high for the past 95 years, with the top .01% (yes, that is one-hundredth of one percent) receiving 6% of all U.S. wages.

In 1928, the top 10 percent of earners received 49.29 percent of total income. In 2007, the top 10 percent of earners garnered 49.74 percent.

In 1928, the top 1 percent of earners received 23.94 percent of income. In 2007, the top 1 percent took home 23.5 percent.

And the lessons learned by our blessed leaders concerning this Great Depression? Prices cannot go down and wealth inequality needs to tick up. An assemblage of price-distorting wizards locked arm-in-arm struggling to defeat the creative destruction blizzard. The insouciance of elites and the Antoinette economy. Exhibit thyself to a public that may hiss thee, bemoan the solons. Let them eat debt!

Quis custodiet ipsos custodes? said the Roman poet Juvenal. Who will guard the guards themselves?

Why, pronounce our modern day guards, we will. Trust us but don't task us lest you see trust in us lost to your peril.

'Don't Task Don't Smell', the central plank of the 'I Can't Believe it's Not Capitalism Plan' has given us Sugar Mountain, where stupidity is cupidity.

The cold hard fact of our age is that the bankrupt ideology of the rich that had greatly succeeded in drafting the inner monologue of regular folks so that they would vote against their self-interests is colliding head-on with a Mr. Market that is a bit pissed off that we've inflated it out of the business cycle for the last quarter century. (AM Rule #6)

After World War 2, our blessed leaders, impressed by German 'organizational' skills crafted a policy of manufacture of consent.Over time these techniques moved to the economic realm in an attempt to manufacture content.Federales now risk the manufacture of contempt, for it is only a Great Depression if they say it is. (AM Rule #1)

Truly we need a hero or it is generation zero.

Financial Pulchritude, Ringfence the Multitude, Federales with Attitude, Brother can you spare a Rhyme?

Phat, Plummed and Cupid is no way to go through strife son.

Sunday, August 15, 2010

The splinter of our disconnect. Fade to back.

Scene 1:

6 year old daughter had been misbehaving during the course of a day. Wife did the old 'wait until your father comes home.' When I arrived home just as the wife was about to regale me with the little one's transgressions, my daughter 'waved her off' and walked towards me with arms extended to support her point; 'Daddy I am still just a little girl, I am going to make mistakes.'

Scene 2:

Driving home from my wife's parents the other night.
She notices that our son (4yrs) was playing with a toy...

Mom: Is that your toy?

Son: No Mama, Grandpa and Nana said I could have it for a week.

AM: I think he is making that up.

Son : (Pause) I changed my mind.

Son: Its' craziness Mama.

Wife: What's craziness ?

Son: Its' craziness when you take a toy that doesn't belong to you.

Son : (Pause)

Son : And I'm a crazy man Mama.

Scene 3:

'Now is the winter of our discontent
Made glorious summer by this sun of York;
And all the clouds that lour'd upon our house
In the deep bosom of the ocean buried.
- William Shakespeare (Richard III),

Fade to Back:

'There are two mistakes one can make along the road to truth -- not going all the way, and not starting."

The first two above are from my children but it is a fractal of the Federales for most certainly crazy men do make mistakes.

The crystallizing mistake of our age, the crime of the century writ large, the splinter of our disconnect... is this epigram: failure to liquidate the insolvent banksters, to dip rich folks' bad speculative bets into the acid bath of price discovery, has liquidated a large part of the productive economy. And so the blast beat of the cyclic drum plays on as we fade to back.

The American Empire came to a fork in the road and instead of taking it we morphed it into a can.

A quarter century of being prophets of our fate, of the Great Moderation, scratch that the Great Modification, of deficits not mattering, of models over history, is serving up the middle class as a burnt offering and may result in our not being masters of our intermediate future as we black diamond towards the denouement of the trusted.

Just got back from a Colorado Springs conference and had the 'same conversation' once again this time with the cab driver. A decade out from California, the fella was a luxury real estate developer, and he shared two stories which characterizes our zeitgeist.

The first is that of a former client who has a 25 million dollar home (well that was what they paid for it) with several million in equity. They would like to refinance with the bank but they can't because the bank has absolutely no idea how to value it, couldn't even give 'em a number or a range.

The second is that this cabdriving victim of the misallocation of productive capital plans to stock up on guns and ammo and, offering the caveat of 'don't laugh with what I'm going to tell you Mr. Stranger in the back seat', has plans to go to Alaska with a portable home (I forget the indigenous term) to live of the land.

Being a contrarian, I suggested to him that his conversation was one that had been oft-repeated as of late (he agreed his associates were all chortling the same) and suggested that if we do get shaked and baked either through gravity dislocations (astro stuff), history relocations (war following financial crisis), or popular sniping (the manufacture of contempt for it is only a Great Depression if they say it is) the big cities will probably be the safest place to be...

After all, if the s$&% comes down do you really want to be out in the hinterlands with every other fella loaded to bare? Sounds like Mad Max to me.

If I knew the way would most probably share it, but he who has a crystal ball most certainly ends up with a mouthful of broken glass.

This I feel to be true... it is a Great Depression but with different characteristics than our First. You can read the intro to this blog as well as the inception date, your humble blogger dropped the tagline of the Great Depression of 2007 prior to the Noblesse Oblige even calling the recession.

In GD1 what was a fella to do? Collect cigarette butts on the street, sit on the porch, listen to the radio, or mayhaps go down to the Bowery and get in trouble?

Now the choices are a cornucopia of low-cost to no-cost diversion. Juvenal would be proud. Watch a movie , read a book, read a paper, or listen to music all for free via the intertubes and collect the government check. All until that zombie movie comes to your local cineplex entitled 99 Weeks Later.

Among the empirical evidence of our current dilemma are current unemployment levels being empirically worse than the worse levels of the Great Depression Volume 1 - if we apply the same measurement metric. Seriously, you can look it up!

Another nugget is the comparable extremes met in the separation of wealth in 1928 and 2007, which has actually upticked through 2010. B.S. Bernanke certainly did learn the 'lessons' of GD1, did he not?

My trading sensei berated me a few days ago in my commenting that this is GD2, with the bromide 'look at all the affluence around us!' My reply was have you ever read newspapers from 1930 and 1931? - Internally I verbalized Hemingway's chestnut...'{there are two ways a man goes broke}, slowly,and then all at once.' Once upon a rhyme is a'comin.

Here in Cook County homes over $500,000 are not to be foreclosed on (add-on : >$500K foreclosures represent about 1% of total per The King Report), the banks don't want to take the hit, the overextended upper middle class with horsehair splintering probably choosing to go to Disneyland (or Nordstrom's?) as they squat in their hut and dream of... I don't know... joining the cab driver in Alaska?

With the upper echelons of America contributing a disproportionate share of consumer spending, and their primary asset frozen in the ember of a 13-16 year downtrend where the buyers are lower and the sellers are higher (most probably chemically since the securitization market for jumbo has gone dumbo) the cyclic clock is ticking, the alarm anticipated, that will start wholesale regurgitation to flippers who will counterintuititively drag the 'cancer clearing' out as the fast money waits for the the Groundhog Day bounce back of the ever-imminent recovery right around the corner of a round room.

A generational circle smirk as it were.

And with trillions of meatballs thrown at the problem, the reserves at the Fed being nothing more than a dip financing for a generational workout, private demand is down ticking for the first time since 1928? Viva la V-shaped scratch that seeds abounding scratch that nascent scratch that unusually uncertain recovery!

If the inflection point between inflation and deflation is believing in wizards or believing your lying eyes the Oracle at Eccles better fire up the jets prior to meeting with the Jackholios cause people are squinting at the eye chart and rubbing sus ojos.

Now is the splinter of our disconnect
Made glorious summer by this sun of Ben;
And all the clouds that lour'd upon our house
In the deep bosom of our equity buried.

Fade to Back.